NetApp: Baird Cuts to Sell; EMC, Others Gaining

By Tiernan Ray

Shares of NetApp (NTAP) are down 49 cents, or 1.3%, at $37.35, in advance of tomorrow afternoon’s fiscal Q4 report, after R.W. Baird‘s Jayson Noland cut his rating on the stock to Underperform from Neutral, with a $34 price target, writing that despite what may be an “OK” report, the company faces multiple challenges.

“We are not advocating a short position in front of the quarter due to the possibility of a positive investor reaction to opex rationalization or shareholder friendly use of cash,” writes Noland. “We do recommend investors take profits on recent upside or potential strength.”

Recent data gathered from surveying resellers, writes Noland, suggest competitor EMC (EMC) has been gaining share because of more innovative product such as EMC’s “VNX” series:

Per Gartner data, EMC has been a steady revenue market share taker (11 points since Q1’09), while NetApp’s share gains have been more inconsistent. As of CQ4’12, NetApp claimed 11% share of the market. International Business Machines (IBM), Hitachi Data Systems, Hewlett-Packard (HPQ), and Dell (DELL) are still relatively close to NetApp in terms of share (16%, 9%, 8%, and 7% respectively) […] NetApp historically has been an outperformed in our reseller work, but since Q3’11, EMC has outperformed NetApp. We believe EMC’s outperformance is due to the introduction of VNX, a more innovative overall product set, and increased channel friendliness. On the other hand, resellers have become more likely to look outside of NetApp for strategic solutions for their customers, and increasingly have complained of lack of product innovation and severe discounting […] In our Q1’13 Enterprise VAR Survey, NetApp (plus FlexPod) ranked behind Cisco’s UCS and EMC (plus VSPEX) in terms of Hardware performance. We believe NetApp is benefiting from UCS momentum given the joint reference architecture, FlexPod. Several VARs have mentioned their FlexPod growth is robust, while their standalone NetApp business is flat or down. Despite the joint success with FlexPod, we do not view Cisco Systems (CSCO) as a likely acquirer of NetApp. Despite a long-time OEM relationship with IBM, management made comments on IBM Q1’13 earnings call suggesting more of a focus on its internal Storage products. We do not view an IBM acquisition of NetApp as likely either.

Among other concerns that Noland expresses, the company needs to release products using NAND flash memory technology, instead of disk, because “While the aggregate spend on Flash-based storage is relatively small today, we believe IT buyers in key verticals (e.g., Financial Services/Tech/Web 2.0) are increasingly turning to Flash-based solutions at the expense of disk.”

“We do expect NetApp to launch its own all-Flash array in F14,” he writes.

He’s also worried by what seems to be trimming of NetApp’s workforce, rather than staffing up:

Per field work and our job tracker, we believe the company has become incrementally cautious on hiring over the last few months with a meaningful reduction-in-force a real possibility. Historically, NetApp has invested into downturns so this would be a noteworthy change of direction.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.